Moody’s downgrades China, warns of fading strength
SHANGHAI/BEIJING: Moody’s Investors Service downgraded China’s credit ratings yesterday for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.
The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fuelled stimulus.
“The down grade reflects Moody’ s expectation that China’s financial strength will erode somewhat over the coming years, with economywide debt continuing to rise as potential growth slows,” the rating agency said in a statement, changing its outlook for China to stable from negative.
China’s Finance Ministry said the downgrade, Moody’s first for the country since 1989, overestimated the risks to the economy and was based on “inappropriate methodology”.
“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.
China’s leaders have identified the containment of financial risks and asset bubbles as a top priority this year.
All the same, authorities have moved cautiously to avoid knocking economic growth, gingerly raising short-term interest rates while tightening regulatory supervision.
The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. Moody’s Investors Service
At the same time, Beijing’s need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus, Moody’s said.
“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” Moody’s said.
While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs), it remains comfortably within the investment grade rating range.
China’ s Shanghai Composite index fell more than 1 per cent in early trade before paring losses, while the yuan currency in the offshore market briefly dipped nearly 0.1 percent against the US dollar after the news.
The Australian dollar, often see as a liquid proxy for China risk, also slipped.
One trader at a foreign bank in Shanghai said the spread between benchmark government bonds and those issued by SOEs in US dollars widened by 2-3 basis points.
“It’s going to be quite negative in terms of sentiment, particularly at a time when China is looking to de-risk the banking system, as well as at a time when there’s going to be some potential restructuring of SOEs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank’s Treasury division.